Theoretical asset pricing under behavioral decision making

This dissertation is a collection of chapters that analyze the role of non-standard beliefs and preferences in investor behavior and thereby for financial markets. The first chapter sheds light on the role of non-standard preferences for an ongoing debate on the slope of the term structure of equity risk premia. More specifically, the finding that individuals may act in a risk seeing way, and may not always be risk averse, helps to explain the empirical findings in the literature. The second chapter gives a general theoretical result about learning the distribution of a random variable under limited attention. The main result is that limited attention gives rise to some familiar biases in behavioral finance or implies similar behavior as: a preference for positive skewness, overestimation of volatility, overextrapolative beliefs and probability weighting. The third chapter provides a new empirical finding, namely that the trading volume in the first three years after an IPO is u-shaped. Subsequently, the analysis shows that this new finding can be explained by a model with speculative investors and ambiguity averse investors and thereby also illustrates the importance of ambiguity in finance.